Question 1

The value of a listed call option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

Accepted Answer

A)   II, III, and IV only
B)   I, III, and IV only
C)   I, II, and III only
D)   I, II, III, and IVE) A) and D)
F) None of the above

Question 2

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

Accepted Answer

A)   time spread
B)   long straddle
C)   short straddle
D)   money spreadE) A) and D)
F) C) and D)

Question 3

An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?

Accepted Answer

A)   $32.50
B)   $35
C)   $37.50
D)   $37.60E) A) and D)
F) All of the above

Question 4

Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are)  correct?
I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

Accepted Answer

A)   II only
B)   I and III only
C)   III only
D)   I, II, and IIIE) B) and D)
F) All of the above

Question 5

A European put option gives its holder the right to ________.

Accepted Answer

A)   buy the underlying asset at the exercise price on or before the expiration date
B)   buy the underlying asset at the exercise price only at the expiration date
C)   sell the underlying asset at the exercise price on or before the expiration date
D)   sell the underlying asset at the exercise price only at the expiration dateE) B) and C)
F) A) and B)

Question 6

A futures call option provides its holder with the right to ________.

Accepted Answer

A)   purchase a particular stock at some time in the future at a specified price
B)   purchase a futures contract for the delivery of options on a particular stock
C)   purchase a futures contract at a specified price for a specified period of time
D)   deliver a futures contract and receive a specified price at a specific date in the futureE) A) and B)
F) A) and C)

Question 7

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.

Accepted Answer

A)   covered call
B)   long straddle
C)   naked call
D)   money spreadE) C) and D)
F) A) and C)

Question 8

An Asian call option gives its holder the right to ________.

Accepted Answer

A)   buy the underlying asset at the exercise price on or before the expiration date
B)   buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life
C)   sell the underlying asset at the exercise price on or before the expiration date
D)   sell the underlying asset at a price determined by the average stock price during some specified portion of the option's lifeE) B) and D)
F) A) and C)

Question 9

What combination of puts and calls can simulate a long stock investment?

Accepted Answer

A)   long call and short put
B)   long call and long put
C)   short call and short put
D)   short call and long putE) B) and C)
F) All of the above

Question 10

A convertible bond is deep in the money. This means the bond price will closely track the ________.

Accepted Answer

A)   straight debt value of the bond
B)   conversion value of the bond
C)   straight debt value of the bond minus the conversion value
D)   straight debt value of the bond plus the conversion valueE) A) and D)
F) All of the above

Question 11

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be ________.

Accepted Answer

A)   $150
B)   $400
C)   $600
D)   $1,850E) All of the above
F) C) and D)

Exam 15: Options Markets

A convertible bond is deep in the money. This means the bond price will closely track the ________.

Correct Answer
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An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?

Correct Answer
verified

What combination of puts and calls can simulate a long stock investment?

Correct Answer
verified

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.

Correct Answer
verified

A European put option gives its holder the right to ________.

Correct Answer
verified

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

Correct Answer
verified

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be ________.

Correct Answer
verified

A futures call option provides its holder with the right to ________.

Correct Answer
verified

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

Correct Answer
verified

An Asian call option gives its holder the right to ________.

Correct Answer
verified

Correct Answer
verified

Exam 15: Options Markets

A convertible bond is deep in the money. This means the bond price will closely track the ________.

Correct AnswerverifiedShow Answer

An investor purchases a long call at a price of $2.50. The strike price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?

Correct AnswerverifiedShow Answer

What combination of puts and calls can simulate a long stock investment?

Correct AnswerverifiedShow Answer

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.

Correct AnswerverifiedShow Answer

A European put option gives its holder the right to ________.

Correct AnswerverifiedShow Answer

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

Correct AnswerverifiedShow Answer

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be ________.

Correct AnswerverifiedShow Answer

A futures call option provides its holder with the right to ________.

Correct AnswerverifiedShow Answer

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

Correct AnswerverifiedShow Answer

An Asian call option gives its holder the right to ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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